Mousetrap 3/3/2012 -- the boring stock report.

[Timothy Clontz]

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 13.46%
Hedge XLU -2.26%

Position Date Return Days Call
SE 6/27/2011 18.93% 250 Hold
CLH 7/6/2011 23.92% 241 Hold
GCI 7/14/2011 6.91% 233 Hold
CSGS 10/3/2011 26.09% 152 Hold
NLY 10/25/2011 0.61% 130 Hold
DD 10/27/2011 6.39% 128 Hold
KBR 10/27/2011 26.17% 128 Hold
VG 10/27/2011 -31.79% 128 Buy
TTM 11/30/2011 59.38% 94 Hold
BT 1/4/2012 9.20% 59 Hold

S&P Annualized 2.39%
Small Portfolio Annualized 17.75%
Mousetrap Annualized 20.66%
Hedged Annualized 17.67%

The worst thing about the Mousetrap is that it is abominably boring. Week after week of no change.

The best thing about the Mousetrap is that it is abominably boring. Week after week of not worrying about the macro threats to the global economy, or chasing after the Fed…

It just looks for technical and fundamental bargains, where money is going into companies and where money is going into stocks, and tries to collect the excess money that accumulates.

We aren’t naturally geared for that kind of thing, of course. For a sobering dose of what we are up against, here’s a good article:

http://www.psyfitec.com/2012/02/why-theres-never-been-more-dangerous.html

Right, our natural human instincts, by which we wildly discount long term rewards in favor of short term rewards, are now being algorithmically used against us by machines that can work faster than any human could ever hope. As I noted a few weeks ago, we’d do far better investing on three month old news than on the latest news. These HFTs (high frequency trading algorithms) are even finding ways to place nodes in obscure islands in the middle of the ocean in order to maximize the speed of light in their favor.

What HFTs cannot do is out-WAIT us. If we can stand the boredom, we can make the HFTs work in our favor as they create imbalances for us to collect.

The bad news is that most of my trades, on average, are “losing trades” for months before they finally mean revert toward any kind of real value. All I can do is wait, and wait, and wait, and yawn, and endure countless weeks that my human instincts want me to SELL!!!!!!!!!!!! Or BUY!!!!!!!!!!!!!!!!! Or just DO SOMETHING!!!!!!!!!!!!!!!!

And my instincts are wrong. I keep myself sane by sending out these weekly notes. Makes me feel like I’m doing something while I wait for money to accumulate in the Mousetrap stocks.

The point to this note is: find SOME way of keeping yourself occupied. Fake YOURSELF out instead of letting HFTs or the latest news fake you out. Fundamental investing is almost always “wrong” short term. But if you can wait it out, it’s the best way for a human to beat the system.

For someone trying to follow these trades it means only putting a 10% allocation in the stock listed as a “Buy” and WAIT… sometimes for MONTHS… before the next “Buy” is listed. The Mousetrap took sick months to be fully loaded. Hopefully it can hold onto the selected stocks for a year. But that’s less than one trade a month. It’s… inhuman. But the “human” thing to do is to lose money, so, “inhuman” will have to do…

Tim

[Timothy Clontz]

Condition Bear Market Rally
S&P Target 1020
Small Portfolio IAU & XLF 10.59%
Hedge XLU -2.09%

Position Date Return Days Call
SE 6/27/2011 17.16% 253 Sell
CLH 7/6/2011 22.96% 244 Hold
GCI 7/14/2011 7.35% 236 Hold
CSGS 10/3/2011 25.86% 155 Hold
NLY 10/25/2011 0.18% 133 Hold
DD 10/27/2011 3.45% 131 Hold
KBR 10/27/2011 19.17% 131 Hold
VG 10/27/2011 -36.79% 131 Buy
TTM 11/30/2011 52.63% 97 Hold
BT 1/4/2012 5.84% 62 Hold

S&P Annualized -0.18%
Small Portfolio Annualized 13.81%
Mousetrap Annualized 16.78%
Hedged Annualized 14.05%

The purpose of a model is to take your emotions out of the equation. But it’s still hard to take a hit like today. Granted, I had some discretionary short trades thanks to Len’s timing signal last week and am actually up for the week, but it’s tough to see my own model have such a tough day.

I hope I’ll be able to officially make Len’s kind of timing granularity a part of the model in the near future. Right now all I can do is pass on that he said to go short and comment about discretionary trades.

In the meantime, the model remains fully hedged, as it has been for the past few months.

I mentioned a few weeks ago that the Drug industry was very close to a technical buy point, and that there was a lot of fundamental accumulation as well. Unless there is a gap greater than 1% between SE and PDLI, I plan to sell SE and buy PDLI with a quick double market order. If SE were to gap more than 1% down further than PDLI, I’ll hold and check again at lunchtime. Hopefully I’ll be able to make the exchange tomorrow.

Len is looking at a decline at least to 1300 on the S&P, and my own model shows a potential bottom as low as 1020. That’s a HUGE amount of uncertainty. Sometimes all you can do is define what you don’t know and call it a day.

Being fully hedged, the model should survive whatever happens.

Tim

[Timothy Clontz]

Pascal noted today that they now have sector models running for the nine XL_ sector ETFs that I also monitor on my own "Small Portfolio" model.

Please do not confuse the two. My model basically uses long term non-effective volume for a 1 to 2 quarter expected trade. Pascal's uses short term effective volume for a 1 to 2 week expected trade. A few months ago Pascal analyzed my own sector calls against his IWM robot timing and found them to NOT be compatable. In fact, they worked against each other. Trying to use to two together had worse returns than letting the two simply act on their own.

The reason, I suspect, is that we are doing opposite forms of volume analysis. Mine is a mean reversion trade, and Pascal's is a momentum trade.

PASCAL HAS THE BETTER MODEL. He has multiple computers working in real time with minute by minute data. I have one laptop working on daily data. Yes, my model works -- but if you like mine, you'll adore what Pascal can do.

But whatever you do, please do NOT mix the two!

Tim

[Timothy Clontz]

Condition Bull / Bear Boundary
S&P Target NA
Small Portfolio IAU & XLF 11.66%
Hedge XLU -2.15%

Position Date Return Days Call
CLH 7/6/2011 26.37% 245 Hold
GCI 7/14/2011 5.88% 237 Hold
CSGS 10/3/2011 26.17% 156 Hold
NLY 10/25/2011 0.43% 134 Hold
DD 10/27/2011 3.87% 132 Hold
KBR 10/27/2011 20.43% 132 Hold
VG 10/27/2011 -35.32% 132 Buy
TTM 11/30/2011 57.40% 98 Hold
BT 1/4/2012 6.84% 63 Hold
PDLI 3/7/2012 -1.05% 0 Hold

S&P Annualized 0.72%
Small Portfolio Annualized 15.15%
Mousetrap Annualized 18.13%
Hedged Annualized 15.33%

The PDLI trade was executed, with SE sold at last night’s closing price, and PDLI ending the day with a 1% loss. Exciting way to start the trade, but that’s expected.

Nothing else has changed. Even VG is back to the listed “Buy.”

Tim